Western Economic Developments
September 1998
Please note: This version of Western Economic Developments
contains text only. To view the indicated graphs and tables, please
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- The Twelfth District economy grew at a solid pace in recent months,
although growth has slowed from earlier in the year.
- Payroll employment expanded by 2.3 percent at an annual rate during
June through August, well below the 3.7 percent annual pace for 1997.
- Despite the recent slowdown, employment in the district is growing
more rapidly than nationally. In addition, the District contains four
of the eight fastest growing states in the nation.
- Slackening demand for exports and a downturn in high-tech manufacturing
have combined to damp growth in manufacturing employment in many District
states. However, rapid growth in construction and services employment
have helped keep the District's expansion on track.
The Twelfth District economy continued to expand at a solid pace in
recent months, although growth has slowed since the first quarter. District
nonfarm payroll employment expanded by 2.3 percent at an annual rate during
June through August, slightly off the 2.7 percent annual pace for 1998.
Despite the recent slowdown, employment growth in most District states
continues to outpace growth for the nation as a whole. As measured by
growth in employment over the past 12 months, only Alaska, Idaho, and
Hawaii are expanding at a pace below the national rate of 2.3 percent.
Four District states--Arizona, Nevada, Washington, and California--are
among the eight fastest growing states in the nation.
Leading the District's expansion are the construction, finance, insurance,
and real estate, and services sectors. Employment in the construction
sector surged between June and August, growing by 10.5 percent at annual
rate. Although slower manufacturing growth has put some non-residential
building on hold, residential construction awards remain at very high
levels. The finance, insurance, and real estate sector added jobs at a
rapid pace during June through August, boosting annualized employment
growth in the sector to 4.4 percent for 1998, a full percentage point
higher than the 1997 rate. Employment growth in the services sector also
remained strong, as slower growth in tourism-related sectors was more
than offset by rapid growth in business and personal services.
In contrast, other sectors of the District's economy weakened in recent
months. The manufacturing sector shed jobs, while employment growth in
the transportation and communications, and trade sectors was flat. Slowing
in these sectors owes in part to weakness in East Asia and a downturn
in high-tech manufacturing.
In 1996 and 1997 strong growth in manufacturing employment helped the
District expand more rapidly than the nation. In 1998, slackening demand
for exports and a more general slowdown in high-tech manufacturing have
combined to damp employment growth in manufacturing in many District states.
As a result, District manufacturing employment growth has fallen from
3.7 percent last year to -0.2 percent for the first 8 months of 1998.
The decline in the District's manufacturing sector has reduced overall
payroll employment growth by about ½ percentage point, and narrowed the
gap between the District and the U.S. pace of expansion.
Financial Conditions
District bank earnings were strong in the second quarter. Banks headquartered
in the District reported average return on assets (ROA) of 1.5 percent
and average return on equity (ROE) of 14.3 percent. District ROA was slightly
higher than the national average, while ROE was slightly lower. Banks
headquartered in California recorded average ROA equal to the nation;
ROE was lower than the national average. For small banks in California,
second-quarter results showed an average ROA was 1.1 percent and average
ROE was 10.5 percent, an improvement from the second quarter. Performance
of small banks varied across the state, with small banks in the Central
Valley and Southern California performing worse than small banks in Northern
California.
Asset quality across the District improved in the second quarter, as
the average past-due loan ratio continued on a downward trend. The District's
average past-due credit card loan ratio also declined, but, as in the
nation as a whole, remained high.
A survey of large District banks showed basically unchanged demand for
business loans over the past three months. Overall, demand for home mortgages
strengthened, while demand for consumer loans and home equity loans weakened
somewhat. Demand for commercial real estate loans picked up slightly.
Over the past few years robust growth in manufacturing employment has
helped California expand more rapidly than the nation. Recently, however,
the East Asian financial crisis and excess supply and manufacturing overcapacity
in some high-tech sectors have combined to damp growth in the state's
manufacturing sector. As a result, total payroll employment growth in
California is slowing, drawing closer to the national rate. Within California,
the San Francisco Bay Area has experienced the largest deceleration. This
is serving to equalize regional growth rates across California, although
at a slower overall growth rate than last year.
Manufacturing's Contribution to California's Slowing Economy
After growing by 3.5 percent during the 12 months ending August 1997,
payroll employment growth in California slowed to just 3.0 percent over
the past 12 months ending in August. Although a number of sectors in the
state's economy decelerated, the bulk of the downturn owes to large and
ongoing declines in manufacturing employment growth. Figure 1 shows 12
month growth rates for manufacturing employment and for total employment
less manufacturing in California. Growth in manufacturing employment began
to slow in the third quarter of 1997, a period when most other sectors
of California's economy were expanding. By September 1997, 12 month growth
in manufacturing employment had dipped below the average rate of employment
growth for the state's other sectors. Since that time, manufacturing employment
growth in California has declined almost steadily, and as of August (on
a 12 month basis) was well below the 3.5 percent rate of the remaining
sectors of the state's economy.
To understand the direct effect of the downturn in manufacturing on California
payroll employment growth, it is useful to consider how rapidly the state
would have grown if manufacturing had continued to expand at its earlier
pace. Between August 1996 and August 1997 manufacturing growth in California
averaged 3.6 percent. If manufacturing employment had continued to expand
at this pace during the 12 months ending in August 1998, California's
total non-agricultural employment would be growing 3.5 percent per year,
rather than the actual 3.0 percent realized. Thus, the slowdown in manufacturing
has shaved nearly 0.5 percentage point off growth in the state.
Factors Damping Manufacturing Employment Growth
East Asia. The slowdown in manufacturing, in part, reflects
California's exposure to developments in East Asia. California merchandise
exports represent about 11 percent of state GSP and nearly 50 percent
of those exports are shipped to countries in East Asia (WED, August 1997).
Merchandise exports from California to East Asia have fallen rapidly in
1998 (Table1). During the first half year of 1998 California's exports
to East Asia fell 17.5 percent compared to the first half year of 1997.
The largest contractions were to the ASEAN(4) and South Korea, but exports
to the other NIEs and Japan also declined significantly.
Exacerbating California's vulnerability to East Asia is the fact that
state exports are dominated by three industry categories: industrial machinery
and equipment (SIC 35), electronic and electrical equipment (SIC 36),
and instruments and related products (SIC 38), which contain most of the
state's high-tech manufacturers. Collectively, these three industry categories
account for more than 60 percent of California's total exports to East
Asia.
In 1995 and 1996, while Asia was investing heavily in high-tech capital
equipment, computers, and telecommunications products, exports from these
three manufacturing categories grew rapidly. However, ongoing weakness
in many Asian nations has significantly damped demand for these exports.
Compared to last year, 1998 numbers reveal a 2.1 percent decline in total
exports of industrial machinery, a 2.3 percent decline in exports of electrical
machinery, and a substantial slowing in total export growth of instruments
and related products.1 State exports
of these products to East Asia declined by much more, 17.0, 18.4, and
5.3 percent, respectively.
Slowing High-tech. Weakening East Asian demand for manufactured
high-tech products has aggravated a more general imbalance in supply and
demand growth in the industry. By most measures the high-tech manufacturing
industry never fully recovered from the product-cycle downturn in 1996.
This left the industry particularly vulnerable to market disruptions brought
on by East Asia. These circumstances have combined to produce an industry-wide
slump at least as severe as the decline experienced in 1996.
Indicators of industry-wide trends show ongoing weakness in both the
semiconductor and equipment manufacturing sectors. In July, worldwide
semiconductor sales fell to about $9.8 billion, down 17 percent (nearly
$2 billion) from year ago levels. Although sales in all regions declined,
the Asian market experienced the greatest weakness. July 1998 sales to
Asia were 23 percent lower than July 1997 sales. In the Americas, sales
fell by 17 percent, while in Europe, sales dropped by 4 percent. Declining
sales figures have resulted in manufacturing overcapacity problems.
Declining sales and worsening overcapacity problems have significantly
affected the industry's investment in new plant and equipment. Indicative
of the decline in purchases of new equipment is the monthly North American
Semiconductor Equipment Industry's "book-to-bill" ratio. The semiconductor
equipment "book-to-bill" is the ratio of semiconductor equipment orders
to shipments, from U.S. based semiconductor equipment manufacturers. After
making a partial recovery from the 1996 industry downturn, the equipment
"book-to-bill" began to decline steadily in July of last year. In January
1998 it fell below 1 and currently rests at 0.69, representing $69 of
new orders for every $100 of shipments.
Effects on Manufacturing in California
As East Asian developmets and the high-tech slowdown have softened demand
for manufactured products, California's employment growth in this sector
has decelerated. While the deceleration has been broad-based, producers
of high-tech products have been particularly hard hit. Figure 2 illustrates
the disproportionate decline in high-tech manufacturing growth (defined
as SIC categories 35, 36, and 38) relative to other manufacturing sectors.
Figure 2 compares 12 month growth for three categories: high-tech, transportation,
and all other, which includes a variety of non-high-tech durable manufacturing
sectors such as primary and fabricated metals and furniture and fixtures.2
Figure 2 shows that all manufacturing sectors slowed in recent quarters,
but the deceleration in high-tech was particularly large. Twelve month
employment growth in high-tech fell from an average of about 5 percent
in 1997 to just 0.1 percent in August. In contrast, the slowdown in most
other areas of manufacturing, the exceptions being transportation and
lumber and wood products (not shown), was more modest, falling only about
one percentage point, from 3.5 percent on average in 1997 to 2.8 percent
in August.
Effects on Employment Growth in California
As noted earlier, California's slowing manufacturing sector shaved approximately
0.5 percentage point off state payroll employment growth over the past
12 months ending in August. To better understand which sectors contributed
to this slowing, Table 2 compares the employment shares of various manufacturing
sectors with their contributions to the 0.5 percentage point reduction
attributable to manufacturing. Calculation of these contributions accounts
for changes in the growth rates of various sectors and differences in
their share of total employment.
Within manufacturing, both the durable and non-durable sectors slowed,
with each reducing growth nearly proportional to its employment share.
Durable manufacturing, which constitutes about 60 percent of total manufacturing
employment, accounted for about 75 percent of the total decline in employment
growth, or 0.37 percentage point. Non-durable manufacturing accounted
for the remaining 0.13 percentage point, or about 25 percent of the total
decline.
A more detailed look at durable manufacturing reveals that the vast majority
of the durable manufacturing decline is attributable to industries containing
high-tech manufacturers, namely industrial machinery and equipment, electronic
and electrical components, and instruments and related products. Taken
together these sectors account for nearly 80 percent of the slowdown in
durable manufacturing and 56 percent of the deceleration in total manufacturing.
In contrast, these high-tech sectors make up only 35 percent of manufacturing
employment. The remaining sectors of durable manufacturing account for
a much smaller share of the total decline and account for less of the
slowdown than their employment shares would predict.
Effects on Growth by Region
The disproportionate slowdown in high-tech is changing the regional pattern
of growth in the state. Employment growth in the San Francisco Bay Area
fell from 4.8 percent between July 1996 and July 1997 to 2.1 percent over
the 12 subsequent months. Both San Jose and San Francisco experienced
the sharpest slowing. San Jose's job growth fell from 5.9 percent on a
year-over-year basis during the 12 months ending in July 1997 to 2.4 percent
over the 12 months ending in July 1998. In San Francisco, growth dropped
from 4.5 percent in July 1997 to 1.5 percent in July 1998. This slackening
in the Bay Area reflects its high-tech specialization and strong ties
to East Asia. In contrast, the deceleration in growth in Southern California
has been much smaller. Growth in Southern California fell from 3.5 percent
to 3.1 percent on a year ago basis. Growth in the Los Angeles-Long Beach
area actually accelerated, climbing from 2.6 percent over the 12 months
ending in July 1997 to 2.8 percent over the 12 months ending in July 1998.
Summary
After being a leading contributor to California's rapid payroll employment
growth, the state's manufacturing sector has weakened. Manufacturing employment
growth has declined, and many of the state's manufacturers are shedding
jobs. Although manufacturing declines have been broad-based, producers
of high-tech products have been particularly hard hit. Regionally, the
Bay Area has felt a larger share of the impact than other parts of the
state. This is equalizing growth across California, although overall growth
is slower than last year.
Alaska, Oregon, and Washington
The Alaskan economy continued its on again off again
performance in recent months. Payroll employment was little changed in
June, grew rapidly in July, and contracted in August. Despite these monthly
swings, total payroll employment grew 3.7 percent at an annual rate over
the eight months ending in August, nearly 2½ percentage points faster
than growth in 1997. Solid job growth has tightened state labor markets.
As of August the state unemployment rate was 5.9 percent, down more than
a percentage point from last year.
Robust growth in Alaska's construction, trade, and services industries
is helping the state weather low oil prices, shrinking exports, and a
second year of below average salmon harvests. In the past, when oil prices
declined or fishing deteriorated, so did the state's economy. This time,
however, Alaska's economy is accelerating, demonstrating that the state
is no longer strictly a resource-based economy.
Economic growth in Oregon remained sluggish in recent
months. Total nonfarm payroll employment grew by less than 1 percent at
an annual rate during June through August, slightly slower than the 1.6
percent annual rate so far this year. Growth slowed in many sectors during
the past three months. Manufacturing and trade establishments shed jobs,
and employment in construction, and transportation was little changed.
Only the finance, insurance, and real estate and services sectors added
jobs at their 1997 pace. Slowing growth has pushed the state unemployment
rate to 5.7 percent, a 0.8 percentage point increase over the first quarter
of this year.
Economic difficulties in East Asia are affecting Oregon's exports. During
the first half of 1998, nominal exports from the state declined by 5.7
percent compared to the same period in 1997. Among the state's most important
export commodities, which include industrial machinery and computing equipment,
electrical and electronic equipment, lumber and wood products, and processed
foods, nominal export declines were even larger. As a result, employment
in these industries has contracted steadily. Combined, manufacturers in
these industries have trimmed 2,500 jobs from their payrolls this year.
Washington's economy grew rapidly during the past three
months. Total nonfarm payroll employment increased at an annual rate of
4.5 percent during the three months ending in August, above the 4 percent
pace for the first half of the year. Recent strength owes to expansions
in the construction, transportation, trade, finance, insurance, and real
estate, and services sectors. Despite rapid employment growth, the state's
labor market has loosened this year; the state unemployment rate in August
was 4.7 percent, 0.3 percentage point higher than last year.
Although Washington's diversified manufacturing sector and booming software
industry have damped the impact of East Asia on state employment growth,
state export numbers have weakened. During the first half of 1998, exports
to East Asia declined by nearly 11½ percent. The largest declines were
for agricultural, forestry, fishing, and processed food commodities, as
well as industrial machinery and computing equipment. Exports of transportation
equipment continued to increase, although the pace of growth has slowed
since last year. Declining export demand is affecting Washington's manufacturing
sector. Employment growth in manufacturing grew by less than 1 percent
at an annual rate during the 8 months ending in August, significantly
decline below the 5.1 percent rate for 1997.
Arizona's economy slowed noticeably in recent months,
following a very strong second quarter. Although payroll employment was
little changed in July and August, employment is up 4 percent at an annual
rate for the first eight months of 1998. The pace so far in 1998 is about
½ percentage point less than in 1997, owing in part to a slowdown in manufacturing
job growth. Recently the weakness in Arizona manufacturing has been in
the electrical and non-electrical machinery group, where employment fell
about 8 percent at an annual rate in July and August.
Nominal exports from the state weakened substantially in recent months.
For the first half of 1998, exports were up only 3 percent from a year
earlier, after growing by 17 percent during the first quarter. Japan is
Arizona's second largest export market, following Mexico. About two-thirds
of Arizona's exports to Japan have been of electrical equipment and components.
The electrical equipment and components industry accounts for about one-half
of Arizona's overall exports. The largest private employer in the state,
the electronic component manufacturer Motorola, is in the midst of an
announced 10 percent reduction in worldwide employment and has cited the
Asian economic situation as a significant drag on its profitability.
The pace of economic growth in California slowed in
recent months. Payroll employment increased about 1‹ percent at an annual
rate in July and August, following a second-quarter gain of about 3 percent
at an annual rate. State manufacturing employment is declining, and the
pace of job loss there worsened in recent months; the second-quarter decline
of about ½ percent at an annual rate in manufacturing jobs was followed
by a drop of about 3½ percent at an annual rate in July and August. Among
other sectors, construction, real estate, and business services continued
to experience rapid job growth through August.
The recent declines in California manufacturing employment have been
broad-based. Among durable manufacturers, some of the most noticeable
job losses have been in the aerospace, lumber and wood products, computing
equipment, and electronic components industries. Within nondurable manufacturing,
large job declines in the food, paper, and petroleum-related industries
have been only partly offset by moderate growth elsewhere.
The underlying contraction of the economy in Hawaii
was very apparent in the payroll employment data through July; however,
the preliminary report on labor market conditions in August was more favorable.
Taken together, the reported increase in jobs in August more than offset
the loss in July. However, over the first eight months of the year, employment
in Hawaii has fallen about 1 percent at an annual rate. Recent weakness
is in sectors serving a declining number of visitors. Employment at hotels
fell about 9 percent at an annual rate in July and August, following a
decline of 3 percent at an annual rate in the second quarter. Retail trade
employment also is down. Employment at air transportation firms fell 6
percent at an annual rate in the second quarter, was little changed in
July, and rebounded a bit in August.
More declines in air transportation sector appear imminent, as several
airlines have announced plans to reduce staffing levels this fall. Airlines
are reducing traffic capacity quickly; eastbound lift capacity has declined
10 percent so far this year. Eastbound arrrivals for the first half of
1998 are are down 8 percent. Despite a pickup in westbound traffic, as
of June, total visitor arrivals were down 3 percent from a year earlier.
Idaho's economy grew at solid pace in recent months.
Total nonfarm payroll employment expanded by about 3.7 percent at an annual
rate during the months of June through August; on the same basis, employment
thus far in 1998 has expanded by 2 percent. Growth during the last three
months was led by a surge in services sector employment, which more than
offset sharp losses earlier this year. Employment growth also has remained
strong lately in the finance, insurance, and real estate sector, and among
local government agencies. Overall employment growth has been adequate
to hold the state unemployment rate around 5 percent this year.
Following expansion of 3 percent annually during 1996-97, manufacturing
employment in Idaho has fallen by nearly 1 percent at an annual rate thus
far in 1998, with particularly sharp losses in the last several months.
The slowdown has been concentrated in the durable manufacturing sector
and has been especially pronounced for wood products, metal products,
and industrial machinery. Weak export demand appears to be playing a role;
for the first half of 1998, total state exports were below their 1997
level.
Economic growth in Nevada has been rapid in recent months,
and the state is listed second in the national employment growth ranking.
Total nonfarm payroll employment expanded by 5½ percent at an annual rate
during June through August, which is above the pace from earlier in the
year. Growth was broad based, but it was particularly rapid in the construction,
finance, insurance, and real estate, and local government sectors. In
contrast, the state's key hotels and amusement sector on net lost a substantial
number of jobs in recent months, although rapid expansion of hotel and
casino capacity has continued in Las Vegas. Overall rapid job growth has
tightened state labor markets since the spring; as of August the state
unemployment rate was 4.2 percent, nearly down to its low point from last
year.
The state's durable manufacturing sector has performed very well this
year. Job growth during the first eight months of 1998 was 4.7 percent
at an annual rate, about 2/3 of a percentage point above last year's pace.
In the key subsectors, producers of stone, clay, and glass products and
metal products appear to be benefitting from rapid construction activity
in the state. The state is somewhat insulated from the economic downturn
in East Asia by the small share of its output that is exported to that
region.
Utah's expansion slowed further in recent months. Total
nonfarm payroll employment fell by nearly one percentage point at an annual
rate during June through August, and growth for 1998 has been 1.5 percent
on the same basis. On the plus side, construction jobs have grown at a
solid pace this year, to help meet the demands of substantial nonresidential
building plans. Moreover, state and local governments continue to post
strong job gains. However, growth has slowed substantially in all major
sectors except the government this year. The slowdown has loosened labor
markets slightly; the state unemployment rate has risen to 3.3 percent,
from a low of just below 3 percent at the end of 1997.
Employment in the state's durable manufacturing sector has fallen a bit
this year, and on net the job losses became more pronounced in recent
months. Job losses were most rapid among makers of primary metal products
and electronics manufacturers. Exports do not yet appear to be playing
a key role in this slowdown; Utah's total exports have grown so far this
year.
1 California's exports of these products
began to weaken in 1997 (WED, August 1997).
2 Specifically, the "other"
category includes the 2-digit SIC groups: Furniture and Fixtures; Stone,
Clay, and Glass products; Primary Metal Industries; Fabricated Metal Industries;
and Miscellaneous Manufacturing Industries.
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